China: PBoC cuts RRR as expected – Standard Chartered

Analysts at Standard Chartered notes that the People’s Bank of China (PBoC) announced a broad-based 50bps cut in the reserve requirement ratio (RRR), effective 16 September.

Key Quotes

“In addition, the central bank announced an extra 100bps RRR cut for city commercial banks operating solely within their respective provinces, of which 50bps will take effect on 15 October and 50bps on 15 November.”

“According to the central bank, the move will unlock CNY 900bn of long-term funding, including CNY 800bn from the broad-based RRR cut and CNY 100bn from the targeted RRR cut, and also save banks CNY 15bn in funding costs annually.”

“Implications

Lowering the RRR should help maintain adequate liquidity and offer cheaper funding to the banking system, which should further improve financing to the real economy, especially to SMEs and the private sector, and accommodate the front-loading of local government bond issuance, in our view. The PBoC insisted the move does not change its prudent monetary policy stance.

We expect the central bank to keep credit growth 2-3ppt higher than nominal GDP growth in H2, which would require liquidity injections either through broad/targeted RRR cuts or central bank lending.

We expect the central bank to take more action to lower financing costs for the real economy. We now forecast another 50bps of broad RRR cuts, or equivalent liquidity injections via broad/targeted RRR cuts or the medium-term lending facility (MLF), in Q4 this year.”